The regulator announced today that it would not go ahead with the “substantial favourable effect” mechanism, outlined in a consultation paper in October, whereby it would take back unexpected profits the company had made from a favourable economic environment.
The announcement marks the end of a battle between the regulator and the largest water company which began last year when Thames asked to be allowed to hike customer bills by an additional £29 to cover unplanned costs, mainly around increases in bad debt costs linked to the economic downturn.
Ofwat turned down that application in November, and in turn reserved the right to claim money back from Thames. Thames accepted its decision in December, choosing not to take Ofwat to appeal. The regulator said this was one reason it was not pursuing the deductions.
Ofwat also said it had taken “careful note” of respondents’ views that any re-opening of existing price limits should not be undertaken lightly.
In a statement, Ofwat said: “A particular consequence of our determination of Thames Water’s application has been that, like other companies, Thames Water has now accepted that its investors can absorb cost increases that have occurred in 2010-15 above the allowances assumed in existing price limits. In this context, we consider it to be proportionate that we do not issue a substantial favourable effect notice on Thames Water.”
Ofwat initially said Thames Water may have materially benefited from circumstances beyond prudent management control, not anticipated when its existing price limits were set in 2009.
Thames Water argued that of the substantial effects notice should have been made to all companies, having equally benefitted from favourable economic conditions. However, the Consumer Council for Water backed Ofwat, saying that such an approach differentiates companies and was essential to incentivise responsible corporate behaviour.
Thames Water, which declined to comment, yesterday announced it would be the only water and sewerage company to increase bills for this year above inflation, with a rise of 3.4 per cent.